Welcome to this week’s episode of the Rentvesting podcast. This is actually a pretty interesting episode. I was reading the newspaper recently and there was yet another article about a “20-year-old property young gun who bought three properties in three years, he’s so amazing, here are his 7 tips”. I’ve seen a few of those. There was one last year where the guy owned 30 properties. I skimmed through the article and looked at the comments, and in a lot of cases, they had golden parachutes such as money from parents. In today’s episode, we’re going to talk about the actual tips in buying three properties in three years. This means starting from nothing and how it is possible to do without those ‘golden parachutes’.
- Firstly, the strategies on how to get that initial deposit, buy an initial investment property and then rent and repeat the strategy for propertes 2 & 3. Depending on your dedication, serviceability and income(s) you can definitely do this in 3 years.
- We’ll be talking about a few strategies and give you some practical hints and tips that you’ll definitely be able to put into practice straight away. Louis has some sweet calculators which we’ll talk about later.
Step 1: Getting that deposit. The aim with investment property is not to have the emotional connection. You should aim relatively low, e.g. approximately $250,000-300,000. You can still find decent property in certain areas which can generate a positive cash flow. The premise with Rentvesting is that living in Willerby or Sydney doesn’t mean you have to buy there. As Louis said, remove the emotions and you can make good investment decisions. Gathering that deposit will depend on two things: your ability to save and your commitment to saving. These are two separate things. Most people having the ability but not the commitment.
If you’re starting from scratch, in 12 months it’s going to take about $3000 a month to save to achieve the $40,000 target deposit assuming you’re going for a 20% deposit. If you were going to go for a 10% deposit, that would get you access to a property for $400,000 at that savings rate.
There’s a budget which we call 50/25/25 budget. This is where 50% of your after-tax incomes is spent on essential living expenses, 25% is spent on lifestyle and discretionary spending. The remaining 25% should them go to savings.
Let’s look an example: a young couple, one is earning $100,000 a year, the other is earning $60,000 a year. They have no home and want to enter the property market. Their combined net income is $121,000 per year. If they followed the 50/25/25 rule their budget sheet would look like this:
- Living expenses $60,000
- Discretionary expenses $30,000
- Combined outgoings: $90,000
This would give them that $30,000 deposit they needed. If they started with $10,000 in savings they could easily get that deposit within the first 12 months.
What’s the easiest way to be more disciplined with your savings? Where do you start?
You do need to have that initial audit of where you are currently at. If someone has no idea what they are spending and they spend on their credit cards then there is the answer. You can look through month by month because typically people have the exact same by direct debits every month, then on top of that is all their discretionary spending. Therefore, if they’ve already got a mortgage they’re paying for its pretty easy to figure out. There are programs such as pocket book and others that actually do the numbers for you. So the first step is to complete that audit. Spend half an hour doing it, it is well worth it although it can be a bit of a shock…
If you are aiming higher, it’s harder to build a deposit from nothing in that 12-month time frame, which is why to get into the property game we’re saying to aim low if you have nothing. You may be lucky and have equity in your current home. What you would do there is revalue the home, create a separate investment account and take money out of that towards a deposit elsewhere.
The last point on how to get a deposit (these are called the golden parachute) is money gifted from parents. You can get a guarantor loan using the equity the guarantor’s property in your name. You can also use various first home owner grants as a deposit, where you might choose to live in the property for the first 6-12 as the deposit from these grants could be around $15,000 – $20,000. You can then move out and turn it into an investment property.
How Louis got into the property market was through Rentvesting. I was living close to uni in a bit of a shack, paying pretty low rental every week but using all my additional income to save towards the deposit. Rentvesting is a good strategy to help you get there.
Now you’ve got your deposit. We’ll put a tool on the Rentvesting website, where you put your property price and time period you’re looking at for saving and how much you already have. It will then work out what the shortfall is, how much to save every week and where to put it as well.
You’ve got your deposit and now buying the investment is the next step. This can be tiring and time-consuming if you don’t know where to go or what area to look at.
This is where you need to look at using experts. This is where a buyer’s agent can come in and can save you time and stress in the long term. People forget that they’ve got the whole of Australia to invest in. You can save yourself a lot of time and stress by giving a buyer’s agent your exact criteria. You can say I want to buy a property for $250,000 which will give me $X rental return a year and has good upside on capital growth and maybe low vacancy as well.
They would be the biggest things you would look for. You want something that is positively geared because the whole purpose of this is using that first home.
Before we move on from the buyer’s agent, one thing that I see time and time again is people thinking that they can get good advice for free. Over the last few years there has been a proliferation of Spruikers and property investment experts, people who say we can help you buy a property through our special club that is exclusive to us and we don’t charge fees, we’re are paid through commissions which can end up being 5% or 10% of the purchase price.
One thing to remember that there is a price on good advice and a bigger cost on bad advice. If someone is giving you amazing advice for free, AKA a Spruiker, you need to be wary. Whilst a buyer’s agent might not be free in the long run, as long as they’ve got the right advice, it can work out a lot better for you.
Here’s a little analogy on that. Say if you go to a butcher, their job is to sell you that meat. If you go to a dietician, their job is to figure out what your overall health is. You’ll pay a bit more to go to that dietician, and they won’t actually directly sell you that meat. The whole purpose of the dietician is to say, “well maybe you don’t need that much meat and maybe you could supplement it with vegetables”, whereas the butcher will just try to sell you as much meat as possible which may throw everything out of proportion. That’s the difference between someone who’s just trying to sell you a property and a buyer’s agent which is there to work in your favour.
Coming back to what you look for when you’re buying the property, if you’re looking for Rentvesting in rental properties, it’s like any other investment. Ideally, you want positively geared, net cash flow, money getting paid to your account every month. You don’t want it to cost you any money and to speculate on capital gains. Removing that emotional component is where a buyer’s agent can help because you’re not out there, you don’t really see the properties. If they are well regarded and do their job properly, you will never really have to see that property.
The last point is that you really want to aim for low vacancy because the property is your means of generating income which you want coming through every week. There’s nothing worse than paying a mortgage and getting no rent because that’s costing you money and definitely not a positive cash flow.
What’s the next step?
The next step is gearing towards your next deposit. There’s more room to play now that you have an investment property. If it is positively geared, you can start using the additional rental income putting towards an offset account against that property helping to make it more positively geared. Keep saving away that 25% into an offset account against the investment. You will reduce deductibility, but the deductibility is only as good as your marginal tax rate.
So in English, once you own a property and it’s positively geared, it will be paying you a surplus of $x amount in rent per week (e.g. $50 or $100) that you can put towards savings. In addition, you’ve got your income that you can bank and deduct or not deduct.
Depending on the time period and how much you’re putting away, you aim for another 12 months, so putting some savings away and the surplus income from the property plus your own income. If, after 12 months, you haven’t got enough, you can get some potential equity out of that first investment. So if property prices have gone up by 4% or 5% within that 12 month period, you can get the property revalued and take some additional equity back up to 80% loan, which can form part of the next deposit.
After that, you have to find property 2. You look at that point to get another property and probably get a buyer’s agent. It’s probably pretty important to diversify. If you’re going to have a good investment portfolio of properties, don’t just buy 10 apartments in the same building. If you had a portfolio 10 years ago that entirely comprised of video shops and then suddenly Netflix came along, that’s not good for your portfolio because now they don’t exist. Equally, in property, it’s not good to be 100% invested one area, one type of property, in one location that’s dependent on one industry. It’s good to be varied and diversified because that hedges your risk. Look at different states, different types of property, apartments or commercial depending on what you’re aiming for. Again, that’s where a buyer’s agent can come in handy. If you give them the criteria of what you’re after, they’ll be able to point out a property that will service that.
That’s the initial strategy. The whole thing is three properties in three years so you want to repeat that again. You’ve now got two properties that you’ve purchased, hopefully positively geared earning additional income and you’re still saving 25% as well. Then at the end of the 3rd year, you can revalue all the properties, get additional equity potentially, and utilise that as another deposit.
That’s the whole three properties in three-year strategy. We’ll be doing a proper plan and we’ll release a little eBook which details this and the numbers around it. You can also do a little online test as well to see if it is appropriate for yourself. If your incomes aren’t quite high enough you can maybe delay it by a couple of years.
In summary, whilst it’s nice to have a free gift, you can save the deposit using the 50/25/25 saving rule or if you’ve got parents who can loan you the money and over time you can do the same strategy repay them over the first 12 months.
When you’re looking at buying, buy smarter don’t just buy it because you can afford it. Do your research. Employ a professional who does this day in day out and knows the areas intimately and can see things you don’t.
Buy the property. Rinse and repeat.
In a way, you could aim for 5 in 5 or 10 in 10. It depends on what you’re after. If you get to three properties in three years you could stop property at that point and use this positive income to invest elsewhere like shares and other growth assets and help diversify those incomes. If it’s all in property and property drops, then 100% of your investable assets drop. It does help to be slightly defensive sometimes. You can go with as many properties as you want, but you need to be diversified. It’s all about risks and rewards.
I hope you enjoyed this episode! Make sure you check out the website www.therentvestingpodcast.com.au we’ve got loads of good material, we’ve got transcripts of the episodes, Louis’ awesome tools. We’re working on a Rentvesting calculator which we expect to be out at the end of the year. Otherwise, we have a heap of other excel spreadsheets like Louis’ saving one and the deposit calculator where you can work out how much you need to put away every month.
The Rentvesting Podcast, available on iTunes, was created by Red & Co’s Jayden Vecchio and expert financial planner Louis Strange. Together, Jayden and Louis unpack the facts behind the property market, explain what’s really going on & where the market is heading. They believe in challenging the status quo and want to get out there to educate absolutely anyone looking to enter the property market.